Schemes betting the wrong way on UK plc

Office for National Statistics data released last week revealed UK pension funds were investing heavily in overseas markets.

Its quarterly investment report showed pension funds have been moving their money out of UK equities, and towards gilts and overseas securities.

Net investment in index-linked gilts was £3.8bn, but overseas corporate securities were up £3.7bn. UK pension fund investment in mutual funds was also down £1.5bn, but overseas mutual fund investment was up £7bn.

Piers Hillier, head of overseas equities at Kames, said: “Emerging market growth is certainly an opportunity, but the valuation gap is such that developed markets, and particularly the UK, still offer much better risk-reward at this time.”

He cited the cuts to corporation tax and the many UK companies committed to raising their dividends as cause for optimism.

“There are 50 examples of companies in the UK that consistently grow their dividend, and most of the value of equities right now is actually in the dividend,” he said.

UK pension funds currently own approximately 11 per cent of FTSE 100 equities, down from around 25 per cent 10 years ago.

Hilliers said fund managers were mistaken if they were solely moving out of UK markets in order to achieve global diversification.

“There’s an argument for overseas securities from diversification, but structural observation of the market shows that the UK stock exchange is the most globally diverse in the developed world,” he said.

“A strategy that says ‘I’m going to sell UK to buy overseas’ is nonsense, and politicians need to promote the global diversity of UK markets more aggressively, and prompt greater UK ownership in companies.”